Reduce your tax
Haven’t you paid enough already?

So how do you reduce your tax?
It’s simple, through property investment!

Well, the first thing to understand is that the rent received from a property actually increases your tax! This is because it is considered as an income. But it is all the expenses associated with holding the property, including that ever so valuable ‘depreciation’ that reduce your taxable income and result in giving you a tax return.

You own an investment property worth $600,000 with a $540,000 mortgage, and it rents for $550 per week (or $28,600 per year). The first thing the ATO does is add the rent received to your income. Let’s say you earn $100,000 per year. So your income would then be $100,000 + $28,600 = $128,600.

So at this stage, if you had no deductions to make you would be liable to pay 37% tax on the extra $28,600 you received in rent. Fortunately, you will have plenty of deductions to cancel out the rent received and take your “on paper” taxable income below what you have been taxed on, so you can get a refund.

The first deduction is the interest and bank fees on the $540,000 loan. At 4.5% interest, the yearly interest would be $24,300.
The next deduction would be the management fees the rental manager charges. Let’s say they were taking 8.8% of the rent to a total of $2,517.

Then we have Insurance of $1,200 (this would include Building Insurance and Landlords’ Insurance), rates of $2,000 and maintenance at $500. The total would be $3,700.

Finally, we have depreciation. For this example, let’s use a round figure of $20,000.

So our total deductions are $24,300 + $2,517 + $3,700 + $120,000 = $50,517.

So whilst the rent increased our taxable income to $128,600, the $50,517 in deductions has brought us back down to $78,083 on paper in the eyes of the tax office. As such, because we paid tax on our original salary of $100,000, and should have only paid tax on $78,083, we are due a refund!

Someone earning $78,083 should only pay tax as follows:
$18,200 at 0% = $0
$26,799 at 19% = $5,092
$33,084 at 32.5% = $10,752
TOTAL Tax should have been $15,844

So if we paid $22,967 (on $100,000) and should have paid only $15,844, the tax office owes us a $7,123 refund! That’s over $130 per week that you wouldn’t be getting if you didn’t understand tax and in particular depreciation. And that’s why astute property investors get big tax returns.

You can imagine the result when you have multiple properties, many property investors do get to the point where they don’t pay any tax at all! Wouldn’t that be nice?

Now of course, we are not accountants and the area of taxation is something that is constantly changing, so you should always speak to your accountant first before making any decisions on the basis of how they will benefit your tax situation.

I hope this series helped you understand how to pay less tax by buying an investment property!

Please contact us should you need any further information or assistance.
~Daimien Patterson

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Legal Disclaimer: This information ('the information') is presented for illustrative and educational purposes only. It is not presented nor should it be treated as real estate advice, legal advice, investment advice, or tax advice. All investments involve risk and potential loss of money. If you require advice in any of these fields you should contact a suitably qualified professional to assist and advise you. Your personal individual financial circumstances must be taken into account before you make any investment decision. We urge you to do this in conjunction with a suitably qualified professional. Daimien Patterson, IntegrityX Enterprises Pty Ltd, and their associated trading names, companies, researchers, authorised distributors and licensees, employees and speakers do not guarantee your past, present or future investment results whether based on this information or otherwise. Daimien Patterson, IntegrityX Enterprises Pty Ltd and their associated trading names, companies, researchers, authorised distributors and licensees, employees and speakers disclaim all liability for your purchase decisions. You should do your own independent due diligence and seek the advice of qualified advisors before making any investment decision.